'U^U, — I , UC-NRLF ill nil mill iim III. B M 57T Oan I CONSTjyUTIONAL CONVENTION 1 107! BULLETIN NO. 13 Farm Tenancy and Rural Credits Compiled and Published by the LEGISLATIVE REFERENCE BUREAU Springfield, Illinois CO NO Q [Printed by authority of the State of IlLnota.] y CONSTITUTIONAL CONVENTION BULLETIN No. 13 Farm Tenancy and Rural Credits '^^fi^ Compiled and Published by the LEGISLATIVE REFERENCE BUREAU Springfield. Illinois [Printcfl by authority of the State of Illinois.] ScHNEPP & Barnes, Printers Springfield, III. 1919. 28722—1500 .,««UB=*HV-.aK.cu..u«.P.«-. LEGISLATIVE REFERENCE BUREAU. Governor Fkaxk O. Lowdkx, Cluiinnan. Senator Edward C. Curtis, Grant Park, Senator Richard J. Bakr, joliet. Representativk KinvARi) J. Smkjkal, Cliicacjo. Represkntativk William V. TIoladay. Danville. E. J. Vf.rlie, Secretary. W. F. Donn. in charge collection of data for eonsiitutinnal com'cntinn. ^:87J27 TABLE OF CONTENTS I. Summary Paof. .1083 II. Farm tenancy and absentee landlordism 1<^^5 Farm tenures in Illinois ^^^^ Absentee landlordism in Illinois 1087 III. Systems of rural credits: first mortgage systems: fed- eral farm loans ^^^^ National Farm Loan Associations 10^<^ Capital stock of national farm loan associations 1092 Powers of national farm loan associations .1092 Farm loans made through national farm loan associa- tions ^^^^ Federal Land Banks 1<^^^ Farm loans made by the federal land banks lO'-^l Terms and conditions of loans made by federal land banks ^^•'^' Powers of federal land banks 1098 Restrictions on federal land banks 1009 Agents of federal land banks 1090 Bonds of federal land banks 1 100 Joint Stock Land Banks ' 100 Differentiated from federal land banks UOO Farm loans made by the joint stock land banks UOl Amortization Plan of the Federal System 1 103 Amortization methods of the federal land banks and the joint stock land banks 1 101 Application of amortization and interest payments 1105 Investments in Farm Loan Bonds 1 10f> Provisions safeguarding investments 1106 IV. Other first mortgage systems 1 1 10 State systems ^^^^ 1 1 1 fi Foreign systems ^^ ^" V. Systems b.\sed on second mortgages HIS TABLE OF CONTENTS Pack I. Summary II. Farm tenancy and absentee landlordism H>S5 Farm tenures in Illinois ^^^^ Absentee landlordism in Illinois 1087 III. Systems of rural credits: first mortg.vge systems: fed- eral FARM LOANS l^"' National Farm Loan Associations 10^^ Capital stock of national farm loan associations 1092 Powers of national farm loan associations 1093 Farm loans made through national farm loan associa- tions ^^^^ Federal Land Banks ^^^-^ Farm loans made by the federal land banks 101)4 Terms and conditions of loans made by federal land banks l"-*^» Powers of federal land banks 1098 Restrictions on federal land banks 1000 Agents of federal land banks 1000 Bonds of federal land banks 1 l<^f^ Joint Stock Land Banks ' '<»<> Differentiated from federal land banks 1100 Farm loans made by the joint stock land banks 1101 Amortization Plan of the Federal System 1103 Amortization methods of the federal land banks and the joint stock land banks 1 lOt Application of amortization and interest payments 1105 Investments in Farm Loan Bonds 1100 Provisions safeguarding investments 1106 IV. Other first mortgage systems 111^ State systems 1^^^ 1 1 1 P Foreign systems ^ ^ ' " V. Systems based on second mortgages 1118 " "'" ' CONTENTS— Concluded VI. Systems for short-time credits 1119 VII. Conclusions 1120 Appendix — references 1131 I. SUMMARY. i The provisions of the present state constitution directly invol- ved in the problems of farm tenancy and rural credits include: Art. 4, Sec. 30. Prohibiting the state from loaning its credit. Art. 11, Sec. 5. Forbidding the state to engage in banking. Art. 9, Sec. 1. Requiring taxation to be uniform. The restrictions as to banking activities of the state and the loan- ing of the state's credit read as foUow^s : Art. IV. Sec. 20. "The state shall never pay, assume or become responsible for the debts or liabilities of, or in any manner give, loan or extend its credit to. or in aid of, any public or other corpora- tion, association, or individual" ; and : Art. XI, Sec. 5. . . . "nor shall the state own or be lia- ble for any stock in any corporation or joint stock company or associa- tion for banking purposes now created, or to be her(?after created." These limitations have prevented the organization of coopera- tive credit associations backed by the credit of the state. Whatever organizations have been created under the authority of the state to meet farm loan needs in Illinois have been fostered by private cap- ital. The section requiring taxation to be uniform reads: .•\rt. IX, Sec. 1. "The General Assembly shall provide such revenue as may be needed by levying a tax. by valuation, so that every person and corporation shall pay a tax in proportion to the value of his. her or its property ... in such manner as it shall from time to time direct by general law, uniform as to the class upon which it operates." This limitation stands in the way of a graduated land tax on large holdings, a system of taxation that has been advocated as a means of breaking up large estates. Those who favor this method of taxation urge that it would have a tendency to di.scourage the holding of land for speculative or tenancy purposes, and so bring about the condition they desire — the farming land of the state owned by those who cultivate it. While the aim of a graduated tax is to limit the amount of land that can l)e held by a non-operating owner, the purpose oi farm loan systems is to furnish positive help to actual farmers in securing small farms. The problem in rural credits is how to develop measures that will bring together the person who has money to lend and the young farmer who wishes to establish a home. The credit systems f.o far developed ••'*•• ••..:/•,../ 1084 have generally maae provision for cooperative farm loan associations and land banks, supplementing each other in such a way that the land banks may make the loans to the borrowers and issue their bonds or debentures to the investors. In this way the land bank serves as an intermediary between those who desire to borrow and those who desire to lend on security based on agricultural land. The various systems of rural credits may be grouped under first mortgage systems, second mortgage systems and systems for short time credits. The federal rural credit system is a first mortgage system ex- clusively ; it functions through the instrumentality of the national farm loan associations, (or in their absence through duly authorized agents) the federal land banks and joint stock land banks. These various agencies are organized in such a way that each farmer who becomes a member of a farm loan association may receive the benefit of the combined credit of all its members to the extent of the capital contributed and the limited liability they each incur. The federal system operates exclusively on the amortization plan. The federal farm loan system was enacted after a thorough con- sideration of the various foreign systems of rural credits, and the first mortgage plan was adopted on the theory that the land mortgage bonds must be carefully secured so that they might have a ready sale throughout the country. It has been urged that a system based on second mortgages could be advantageously developed within the limits of a single state where land values are high and conditions are stable, but most of the states so far have duplicated the federal plan, although it is urged that a large field for second mortgages remains unoccupied. A system of short time credits in the form of personal credit cooperative unions has been proposed in order to supply credit for cooperative marketing organizations. Cooperative selling systems as well as plans for cooperative buying on the part of the farmer might be developed under a well devised system of personal credit unions under the supervision of the state. Those who advocate the establishment of a state rural credit sys- tem claim that neither the federal system of rural credits nor the private agencies within the state are adequate to meet the situation in Illinois. On the one hand it is urged that the state system could be operated to advantage in competition with the federal system : on the other hand it has been suggested that a system based on second mortgages would be more advantageous, as such a system could supplement the federal first mortgage system. How may the farm loan needs of the state of Illinois be most ad- vantageously met? What are the relative merits of the several rural credit systems so far developed, and does the experience of other states and other countries offer any suggestions for the farm loan situation in this state ? The constitutional provisions and legislative measures presented in the following pages may furnish some data toward a solution of the problems under consideration. 1085 II. FARM TENANCY AND ABSENTEE LANDLORDISM. Farm tenures in Illinois. Ihe proportion of farm tenants to farm owners has shown a steady increase in Illinois for some forty years. The United States census for 1880 gave some attention to ques- tions of land ownership and farm tenancy in the different states and the data collected at that time gave a higher percentage of tenants in Illinois than in any other northern state. Succeeding census reports left Illinois in the same relative position, showing a higher percentage of tenant farmers than any other state in this section of the United States. In 18S0 there were 23 tenants for every 100 farmers in the United States. In 1010 this percentage had increased to 37.1 per cent for the entire countr}-. In Illinois the proportion of tenants reached 31.4 per cent in 1880, and 41.1 per cent in 1010. At the present time conservative estimates place the number of tenants above 60 per cent for the entire state; and from 60 to 80 per cent for the rich lands in the corn belt. The most conservative estimates indicate that more than half the farmers of Illi- nois do not own the farms they cultivate. When the proportion of tenant farmers exceeds 25 or 30 per cent under agricultural conditions in the northern states, there is occasion for infjuiry. Where not more than one-fourth of the farmers are ten- ants, tenancy may merely represent the stage between agricultural labor and farm ownership. In many cases tenants are relatives of the owner, or the owner is a retired farmer who rents to some young farmer who is accumulating capital in order to purchase the farm later on. Under these conditions the average time spent as a tenant is about ten years and the average f)wncr becomes an owner at about 3.") years.' Where tenancy represents merely a brief transition stage, from which the agricidtural laborer or young farmer becomes the owner of the land he cultivates whenever he shows normal thrift and industry, there seems to be little cause for apprehension : but where tenancy be- comes the average condition of farm life, the interests of the common- wealth are involved. Scientific investigation and common observation seem to unite in the charge that tenant farming results in smaller crops, in declining fertility of the soil, and in a lower standard of social wel- fare, wherever it becomes the dominant method of agriculture. \'arious measures have been proix)sed to meet the growing prob- lem of farm tenancy. Those most commonly urged include: 1. A state land settlement commission : 2. A graduated land tax with pro- ' See reference list for investigations made by Dr. B. F. Hlbbard of the University of Wisconsin, and by Professor G. F. Warrpn of Cornell L'niversity. 1086 gressive rates: (a) varying according to size of holding, and (b) with increased rates for owners who do not operate the land ; 3. Inheritance tax with progressive rate for large holdings ; 4. Equalization of taxes as between used and unused land ; 5. Definite limit on amount any per- son may own; 6. Direct purchase and sale of land by government; 7. Provision for alternative investments. State land settlement commissions are helping solve the tenancy problem in a number of states. Measures enacted in Maine, Oregon, and Arizona are typical of similar measures in force in different sec- tions of the country. The constitutional provision that taxation shall be uniform (Art. 9, Sec. 1) at the present time stands in the way of most of the measures urged for graduated taxes on large land holdings. Section 1 provides that, "The General Assembly shall provide such revenue as may be needful by levying a tax by valuation, so that every person and corporation shall pay a tax in proportion to the value of his, her or its property ... in such manner as it shall from time to time direct by general law, uniform as to the class upon which it operates." The principle of progressive taxation is well established in this country in the income tax and the inheritance tax laws. It has been proposed that this principle be applied in taxing large land holdings. Advocates of this plan propose that the smaller farms be entirely exempt from any graduated tax and that the sur tax should not begin to operate on any holdings not in excess of 640 acres. Others have sug- gested that the size of the holdings exempted should be placed as low as 480 or even 320 acres. On the other hand it has been urged that so small a holding should not be subject to the tax, as the general nature of agriculture in Illinois requires a farm varying from 80 to 320 acres to support a single family. Others have proposed that a sur tax of 20 per cent be placed on all holdings over 640 acres, and that the rate of progression for farms over twice that amount should increase rapidly until the rate for large estates, such as the Scully estate, would become practically prohibitive. Such a provision Avould undoubtedly result in the re- duction of many large estates into small sized farms. A further proposition has been made to increase the rates for owners of large holdings who do not operate the land. It is urged that such a classification, based on the nature and use of the property, would not meet the constitutional objections urged against most of the proposals for breaking up large holdings. It has also been urged that the principle of the graduated land tax be extended so as to be used in connection with the inheritance tax law. Undoubtedly many owners of large estates would elect to escape such a tax by disposing of part of their land in advance. If the rate of progression for the inheritance tax on large holdings were made higher than the rate for the graduated tax on land holdings it would result in giving a flexible margin to holdings. Under this proposal a large family, cultivating extensive lands, as a unit, would not feel 1087 the weight of the graduated tax to such a great extent uniil the trans- fer of the holdings tlirough inheritance. The ecjuahzation of taxes as between used and unused land has further been proposed. This method of taxation is also prohibited at the present time by the Constitutional restriction as to uniformity. Placing a detinite limit on the amount which any person may own is another proposal sometimes urged. This method has been tried with some success in New Zealand. In general, the plan aims at the same result which would be secured under a graduated tax on large holdings, and it has been urged that a graduated tax would be more in keeping with the spirit of our laws and institutions. A system which substitutes direct action on the part of the govern- ment in the purchase and sale of land to settlers has been etifcctively tried in a number of countries. In Xew Zealand this system has been advantageously operated in securing the settlement of the land by small holders. The government in New Zealand buys the land outright anil sells it to small holders at the price paid. Provision is made for a low rate of interest and easy terms of payment. This system has been par- ticularly useful in cases where the state desires to break up large holdings and estates into small farms owned and operated by farmers living on the land. California has provided a land fund through which the state buys land in large holdings and resells it to small farmers on easy payments. This particular state found this method advantageous in the development of its small fruit farms. It has further been urged that provision be made for alternative investments, so that funds now going into land investments might be turned into other channels. This demand has been partially met by federal and state farm loan bonds. The hrst mortgage land bonds issued under the authority of the Federal Farm Loan Board, have opened a wide held to investors who have heretofore bought land as the only safe investment with which they were familiar. Since these bonds offer perfect security and a fair rate of interest, together with opiwrtunity for long time in- vestments, they will have a tendency to influence many investors against the accumulation of land. On the one hand this will result in land being offered for sale, and on the other hand it will withdraw a large grf)up of land buvers. (jiving small investors such alternative opportunities to invest their savings, would accordingly open a large amount of land to actual farmers. L'nless some positive action of this sort is brought to bear u])on non-operating holders of land, the price of land in Illinois is likely to advance far beyond the value of its producing power. Even at the present time the effectiveness of a farm loan system in meeting the tenancy problem is largely discounted by the high cost of land. Absentee landlordism in Illinois. The problem of absentee landlordism has been aggravated in the state of Illinois by a number of great non-resident holdings like the Scully estate. 1088 Measures most frequently urged to meet the problems of absentee landlordism include: 1. Laws prohibiting the ownership of land by aliens; 2. A higher tax rate for non-resi dents. Laws making it illegal for an alien to own land within a state have been enacted in a number of states. Llowever, such laws have usually been circumvented by the acquisition of citizenship papers and fictitious residence in this country ; such aliens becoming naturalized simply on account of the prohibition against alien ownership of farm land. There is the further difficulty that such a provision might be held objectionable under the federal constitution. The proposal to tax citizens at different rates according as they are resident or non-residents within the state might also be objection- able under the federal constitution as being contrary to inter-state comity. The purpose of both of these proposals is, of course, to break up large holdings for the use of actual farmers, who will own and operate the land upon which they live. It has been pointed out that this purpose could be just as readily secured under a graduated land tax ; and that a classification as between operators and non-operators of agricultural lands could be made by any state without being ob- jectionable under the federal constitution. Under such a classification, land held for speculative purposes or large holdings held for occupation by tenants, could be taxed at a higher rate than land which is operated and improved by the owner. 1080 III. SYSTEMS OF RURAL CREDITS: FIRST MORTGAGE SYSTEMS: FEDERAL FARM LOANS. Since the enactment of the Federal Farm Loan Act July IT, 1916, a consiclcral)lc number of National Farm Loan Associations have been organized within this State. By October 31, 1!»19. a total of 1,7G8 loans, aggregating $0.841,17.5.00 liad been placed on Illinois farm lands through these Federal cooperative associations. The total for the entire United States, on the same date showed 103,673 separate loans aggregating $271,317,816.00. The total number of loans and aggre- gate amounts for states contiguous to Illinois for the same period were as follows: Indiana 3.-140 loans and $8,234,700.00; Michigan 2.S02 loans and $o.O!)3.200.00 ; Wisconsin 1,884 loans and $l,4r)r).S()().00 ; Minnesota 3.2r)(5 loans and $9,921,100.00: Iowa 2.522 loans and $17.- 766.350.00; Missouri 2,682 loans and $7,223,050.00; and Kentucky 1,442 loans and $3,691,200.00. Contrasted with these Delaware had only 12 loans in all aggregating $24,500.00, the smallest number as well as the smallest aggregate for any State, while Texas had the largest number of loans as well as the largest aggregate for the same period amounting to 10.643 loans with an aggregate of $29,999,156.00. The Joint Stock Land Banks, also provided for in the Federal act made additional farm loans amounting to $47,633,775.83 for the entire United States. Adding this amount to the total loans made through the Farm Loan Associations for the entire country, gives a sum total of $318,951,591.83 placed on farm loans under the Federal Farm Loan Board in a period slightly more than three years since it was established. The present federal farm loan act is distinctly limited to first mort- gage loans. Such loans involve little risk and therefore permit a low rate of interest and provide a safe basis for the issue of the farm loan bonds. The amortization plan of the federal law further tends to lower the amount of interest actually paid, and this process of paying olT the indebtedness by installment payments of a fixed amount, which in- cludes interest and a part of the princii)al, throughout a period of years, thus provides a regular source of capital for the payment of the farm loan bonds. Briefly summarized, the purpose of the federal farm loan act is to provide capital for agricultural development and to create standard forms of investment based upon farm mortgages; or more specifically, as summarized by the Federal Farm Loan Board. "To lower and equal- ize interest rates on first mortgage farm loans ; to provide long term loans with the privilege of repayment in installments through a long or short period of years, at the borrower's option ; to assemble the farm 1090 credits of the nation, to be used as security for money to be employed in farm development ; to stimulate cooperative action among farmers ; to make it easier for the landless to get land ; and to provide safe and sound long-term investments for the thrifty." The entire system of farm loans under the Federal Farm Loan Board involves two methods of cooperative action : first, cooperative as- sociations of borrowers, operating by means of the farm loan associa- tions and the 12 federal land banks ; second, cooperative associations of lenders, operating through the joint stock land banks. National Farm Loan Associations. The national farm loan associations are organized and controlled by the borrowers : each is made up of 10 or more farmers and it is through these local units that the borrower enters into the benefits of the system. These cooperative units furnish the machinery for bor- rowing and investing, for voting, and for protection against loss. A national farm loan association may be formed by persons desir- ing to borrow money on farm mortgage security by entering into arti- cles of association under the farm loan act. Membership in an associ- ation is limited to natural persons who are actual farmers and who are the owners, or about to become owners of farm land. This includes prospective farmers, tenants, or farm laborers who are about to pur- chase land. The prospective borrowers hold an organization meeting and elect from their members a board of five or more directors, and this board elects a loan committee of three, a president, vice president, and a secretaiy-treasurer, who is a bonded officer. The secretary -treas- urer may or may not be a member of the association. These prospective borrowers, 10 or more in number, then make application in writing to the federal land bank of the district for loans to the aggregate amount of $20,000 and for a charter to do business. They must sign and ac- knowledge articles of association and forward them to the federal land bank. The federal land bank then sends its appraiser to inspect the land ofifered as security for the loans applied for, and, if satisfactory, the loans are authorized when the charter is granted to the association. The bank then advances the money through the secretary-treasurer of the local association. In the application signed by borrowers each must indicate how much money he desires and must list the value of the land to be mortgaged as security ; but no person may borrow more than $10,000 nor less than $100, and in no case may the loan exceed 50 per cent of the value of the land mortgaged, and "20 per cent of the value of the permanent insured improvements. Upon the granting of the charter the individuals signing the appli- cation become a body corporate, and the farm loan association thus or- ganized has the right to do the business authorized by the farm loan act and to have succession indefinitely. When once organized it may take in new members from time to time and thus serve an entire com- munity continuously. 1091 \\'hcne\or any national farm loan association desires to secure a loan on first mortgage for any of its mcml)ers from the federal land bank of its district, it is required to subscribe for capital stock of the land bank to the amount of 5 per cent of such loan ; this subscription is to be paid in cash upon the granting of the loan by the land bank. Such ca])ital stock is to be held by the land bank as collateral security for the payment of the loan, but any dividends accruing and payable on such caj^ital slock while it is outstanding are to be paid to the farm loan association. Such stock may be paid otif at par and retired in the discretion of the directors of the association and with the ap])roval of the Federal Farm Loan Board, and the stock must be paid oft' and retired upon full payment of the mortgage loan. In such case the national farm loan association is required to pay off at par and to retire the corresponding shares of its stock which were issued when the land bank stock was issued. The ca])ital slock of the federal land bank may not be reduced to less than '> per cent of outstanding farm loan bonds issued by it. Any person whcie application for membership is accei)ted by a loan association is entitled to borrow when funds are available imless the federal land bank of the district or the farm loan board determine otherwise. Any borrower may, at his option, pay for his stocic from the proceeds of the loan, provided the total amount of the loan does not exceed the maximum limit of $10,000. Any sum thus borrowed from the federal land bank through the association is to be made a part of the face of the loan and paid off in amortization payments. Subject to rules and regulations prescribed by the Federal Farm Loan Board, any loan association is entitled to retain a commission not exceeding one-eighth of one per cent semi-annually from each interest payment upon the unpaid principal of any loan indorsed by it. Any amounts so retained as commissions are to be deducted from dividends payable to the federal farm loan association by the federal land bank. Any loan association may make application to the federal land bank of the district for loans not exceeding in the aggregate one- fourth of its total stock holdings in the bank. The land banks have the j)ower to make such loans and to charge interest not exceeding (! per cent per annum. Shareholders of every loan association are held individually liable, equally and ratably, and not one for another, to the extent of the par value of the stock owned by them, in addition to the amount paid in and represented by their shares. After a charter has lieen granted, any natural person owning, or about to own qualified land, may become a member of an association upon approval of the directors and uj)on subscribing to stock to the ex- tent of five per cent of his proposed loan. Whenever an ai)plication for a mortgage loan is made to a loan association it must be referred to its loan committee. This committee examines the land, makes an appraisal and a detailed written report, and no loan may be approved by the directors of the loan association unless the committee's report is favorable. The written report and approval of the loan committee are then submitted to the directors of the land 1092 bank, together with the application for the loan. The land bank is re- quired to refer the application and the report to the land bank appraiser for investigation, and no loan may be made by the bank unless the writ- ten report of the appraiser is favorable. Land bank appraisers are re- quired to make such examinations and appraisals and conduct such in- vestigations concerning farm loan bonds, and first mortgages as the Federal Farm Loan Board may direct. Capital stock of national farm loan associations. The shares in na- tional farm loan associations have a par value of $5.00 each. Each shareholder is entitled to one vote on each share of stock held by him at all elections of directors and in deciding all questions at meetings of shareholders, but the maximum number of votes which may be cast by any one shareholder is limited to 20. It is evident that this limita- tion on voting power places all members who borrow more than $2,000 on an equality of voting strength, regardless of any larger loans which they may carry. Only borrowers on farm land mortgages are permitted to be mem- bers or shareholders in the loan associations. Every applicant for a loan must apply for membership and subscribe to stock in the associa- tion to the extent of 5 per cent of the desired loan, and this subscrip- tion must be paid in cash upon the granting of the loan. If the appli- cation for membership is accepted, the loan granted, and the stock paid for, the applicant becomes the owner of one $5 share of capital stock in the loan association for each $100 of the face of his loan or any major fraction thereof. Upon full payment of the loan such capital stock is retired : meanwhile it is held as collateral security by the asso- ciation, but the borrower receives any dividends accruing and payable while it is outstanding. The amount of capital stock is to be increased by the association from time to time for the purpose of securing addi- tional loans for its members and providing for the issue of shares to borrowers in accordance with the provisions of the act, but any such in- creases must be stated in the quarterly reports to the Farm Loan Board. Pozuers of national farm loan associations. Every national farm loan association has the power to indorse and thereby become liable for the payment of mortgages taken from its shareholders by the federal land bank of its district; to receive funds advanced by the land bank and to pay over such funds to the borrowers. It may further issue cer- tificates against deposits of current funds and convertible into farm loan bonds when presented at the federal land bank of the district in the amount of $25 or any multiple thereof ; such deposits when received, are forthwith to be transmitted to the land bank and be invested by it in the purchase of farm loan bonds issued by a federal land bank or in first mortgages under the act. The association is further empower- ed to own such property as may be required for the transaction of its business. Farm loans made through national farm loan associations. The following statement compiled from data supplied by the Federal Farm Loan Bureau shows the number of loans made by the Federal land banks through the national farm loan associations since the enact- ment of the federal law, and up to October 31, 1919, inclusive. Totals 1093 arc shown for each separate state, for each of the twelve federal land bank districts, and for the entire United States. Statement shoicing loans in the taelvc federal land bank districts from organization to October 31, lOl'J. Total loans. Springfield No. Amount. Maine 550 $1,187,300 New Hampshire 159 3:53.000 Vermont 324 827.450 .Massachusetts 622 I.SCG.ISS Rhode Island 53 125.(150 Connecticut 410 1,255,350 New York 1,409 4,327,990 New Jersey 244 810,550 Total 3,771 $10,433,445 Baltimore Pennsylvania 934 $2,441,200 Virginia 2,484 6,608.250 West Virginia 642 1,172.150 Maryland 216 682.200 Delaware 12 24.500 Total 4,288 $10,928,300 Columbia North Carolina 2,676 $4,737,800 South Carolina 1,683 4.542.040 Georgia 1,008 2,625.885 Florida 1,437 2,536,770 Total 6,804 $14,442,495 Louisville Tennessee 2.05S $5.1 63.700 Kentucky 1.442 3,691.200 Indiana 2.440 8.234,700 Ohio 565 1,810,500 Total 6.505 $18,900,100 yeic Orleans Alabama 3,493 $5,892,070 Louisiana 2,681 4,310.190 Mississippi 6.595 8.465.670 Total 12,769 $18,667,930 St. Louis Illinois 1.T6S 6.841.475 Missouri 2,682 7.223.05O Arkansas 4.924 7.531.755 Total 9.374 $21,596,280 St. Paul N Dakota 5.264 $15,912,900 Minnesota 3.256 9.921.100 Wisconsin 1.S84 4.4.'-.5.800 Michigan 2,802 5,093.200 Total 13,206 $35,383,000 1094 Loans in the tivelve 'federal land bank districts — Concluded. Total loans. Omaha No. Amount. Iowa 2,522 $17,766,350 Nebraska 2,559 10.770,390 S. Dakota 1,635 6,568,750 Wyoming 455 1,026,200 Total 7,171 $36,131,690 Wichita Kansas 3,147 $11,101,500 Oklahoma 2,638 5,266,900 Colorado 2,445 5,714,600 New Mexico 1,881 2,878,900 Total 10,111 $23,961,900 Houston Texas 10,643 $29,999,156 Total 10,643 $29,999,156 Berkeley California 2,931 $9,588,700 Utah 1,483 4,202,100 Nevada 38 172,600 Arizona 234 615.500 Total 4,686 $14,578,900 Spokaiie Idaho 2,517 $ 7,178.645 Montana 4,116 10,102,850 Oregon 3.155 9.188.080 Washington 4,556 9,825,045 Total 14,344 $36,294,620 Total for 12 districts 103,672 $271,317,876 Federal Land Banks. The federal farm loan system is essentially a farmer's banking system, and the law contemplates that the farmers shall eventually own and control it. The borrowers in the farm loan associations will ttnti- mately become the entire owners of the federal land banks, as the gov- ernment stock and the stock originally subscribed by others than bor- rowers will be gradually paid oft and retired, and the subscriptions made by farm loan associations, will supplant the advances which the government made in the beginnig, in order to establish the system on a firm basis. During the year ending October 31, 1919, federal land banks refunded $572,569 to the government, thereby reducing the gov- ernment holding of stock to $7,693,240. Farm loans made by the federal land banks. The following state- ment compiled from data supplied by the Federal Farm Loan Bureau shows the total number of federal farm loans made by each of the twelve federal land banks in their respective districts from date of or- ganization to October 31, 1919, inclusive. Ov •^ o 13 ^ c s- 1096 •^ ^. ■^ — bi ■:• ~ -C *. — f. i> l» C * *• 2. 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i£ine» iV )tO — I Q 1-0:0000— OitOXSM 00 SI- -^ -^ o e* >.T ?: » T X »»' 3 X m I- uj uj .-o — "I I «o* — — c>»3c»min>nrti«*>in « ■•» l5 n o « o X 3 r- t- I- o 5s a; o 1-cs 3 c. o I- -rio 00 X 10 -r — t- — in "rintp-r-rOi-« — o — o la S o in »( >n o o X in — — I- 1 o '■•'-3 2 OS o> x" OS — -f as" o ' X Ptoi-ooBeJOafcci-rmco •rininejO — inx — — inm Ti — — — ei el l^ii^ilSi5|!is aooot-:;- .n o:i — t;ino-incx---52;5«" M CO wi 00 « X lO c& « r** r^ 1! CiJ ^ ^ ri j:: Z -i '•> ^ o 1096 When a farmer borrows money he is required to buy stock of his local association equal to 5 per cent of his loan. This stock is held by the local loan association as collateral security until the mortgage is paid, when the money is returned to him, or he may use it as the last payment of his debt. The local association uses the money which the borrower pays for his stock to buy stock in the federal land bank ; this is done to increase the land bank's capital in order that it may make more loans. The law provides for the automatic increase of the capital of the bank because each local farm loan association must buy stock in the federal land bank equal to 5 per cent of the loans it procures for its members. Now, since each land bank is permitted to lend twenty times its capital to the members of the association, it will be seen that the loaning capacity of the bank is increased twenty thousand for each one thousand dollars added to its capital, the ratio between the capital and the loaning capacity always remaining the same. Accordingly, there is no limit to the capacity of the land bank to meet the needs of the borrower so long as it can sell its bonds. If the loans are conserva- tively made, no losses can reasonably occur which would at any time depreciate the value of the bonds. Terms and conditions of loans made by federal land banks. The restrictions placed on federal land banks in making loans are definitely set forth in section 12 of the farm loan act as follows : "Sec. 12. That no federal land bank organized under this act shall make loans except upon the following terms and conditions : "First. Said loans shall be secured by duly recorded first mort- gages on farm land within the land bank district in which the bank is situated. "Second. Every mortgage shall contain an agreement providing for the repayment of the loan on an amortization plan by means of a fixed number of annual or semi-annual installments sufficient to cover, first, a charge on the loan, at a rate not exceeding the interest rate in the last series of farm loan bonds issued by the land bank making the loan ; second, a charge for administration and profits at a rate not exceeding one per centum per annum on the unpaid principal, said two rates com- bined constituting the interest rate on the mortgage ; and third, such amounts to be applied on the principal as will extinguish the debt within an agreed period, not less than five years nor more than forty years : Provided, that after five years from the date upon which a loan is made additional payments in sums of $25 or any multiple thereof for the reduction of the principal, or the payment of the entire principal, may be made on any regular installment date under the rules and regu- lations of the Federal Farm Loan Board : And provided further, that before the first issue of farm loan bonds by any land bank the interest rate on mortgages may be determined in the discretion of said land bank, subject to the provisions and limitations of this act. "Third. No loan on mortgage shall be made under this act at a rate of interest exceeding 6 per centum per annum, exclusive of amortization payments. "Fourth. Such loans may be made for the following purposes and for no other : 1097 "(a) To provide for ihc purchase of land for agricultural use_. "(b) To provide for the purchase of e(|uipiiient, fertilizers and live stock necessary for the proper and reasonable operations of the mortgaged farm ; the term "equipment" to be dehned by the Federal Farm Loan Board. "(c) To j)rovide buildings and for the improvement of farm lands ; the term "improvement" to be defined bv the Federal Farm Loan Board. "(d) To liciuidate indebtedness of the owner of the land mort- gaged, existing at the time of the organization of the first national farm loan association esta])lished in or for the county in which the land mortgaged is situated, or indebtedness subsequently incurred, for pur- poses mentioned in this section. "Fifth. No such loan shall exceed 50 per centum of the value of the land mortgaged and 20 per centum of the value of the permanent, insured improvements thereon, said value to be ascertained by appraisal, as provided in Sec. 10 of this act. In making said appraisal the value of the land for agricultural purposes shall be the basis of appraisal and the earning power of said land shall be a principal factor. "A reappraisal may be permitted at any time in the discretion of the federal land bank, and such additional loan may be granted as such reaj)])raisal will warrant under the provisions of this paragraph. When- ever the amount of the loan applied for exceeds the amount that may be loaned under the appraisal as herein limited, such loan may be granted to the amount permitted under the terms of this paragraph without requiring a new application or appraisal. "Sixth. No such loan shall be made to any person who is not at the time, or shortly to become, engaged in the cultivation of the farm mortgaged. In case of the sale of the mortgaged land, the federal land bank may jx^rmit said mortgage and the stock interests of the vendor to be assumed by the purchaser. In case of the death of the mortgagor his heir or heirs, or his legal representative or representatives shall have the option, within sixty days of such death, to assume the mort- gage and stock interests of the deceased. "Seventh. The amount of loans to any one borrower shall in no case exceed a maxinunn of $10,000, nor shall anv loan be for a less sum than $100. "Eighth. Every applicant for a loan under the terms of this act shall make application on a form to be prescribed for that purpose by the Federal Farm Loan Board, and such aj)plicant shall state the ob- jects to which the proceeds of said loan are to be applied, and shall af- ford such other information as may be refjuired. "Ninth. Every borrower shall pay simple interest on defaulted payments at the rate of 8 per centum per annum, and by express cove- nant in his mortgage deed shall undertake to pay, when due all taxes, liens, judgments or assessments which may be lawfully assessed again.st the land mortgaged. Taxes, liens, judgments or assessments not paid when due. and paid by the mortgagee, shall become a part of the mort- gage debt and shall bear simple interest at the rate of S per centum per annum. Every borrower shall undertake to keep insured to the satis- 1098 faction of the Federal Farm Loan Board all buildings, the value ot which was a factor in determining the amount of the loan. Insurance shall be made payable to the mortgagee as its interest may appear at time of loss, and, at the option of the mortgagor and subject to gen- eral regulations of the Federal Farm Loan Board, sums so received may be used to pay for reconstruction of the buildings destroyed. "Tenth. Every borrower who shall be granted a loan under the provisions of this act shall enter into an agreement, in form and under conditions to be prescribed by the Federal Farm Loan Board, that if the whole or any portion of his loan shall be expended for purposes other than those specified in his original application, or if the borrower shall be in default in respect to any condition or covenant of the mortgage, the whole of said loan shall, at the option of the mortgagee, become due and payable forthwith : Provided, that the borrower may use part of said loan to pay for his stock in the farm loan association, and the land bank holding such mortgage may permit said loan to be used for any purpose specified in subsection fourth of this section. "Eleventh. That no loan or the mortgage securing the same shall be impaired or invalidated by reason of the exercise of any power by any federal land bank or national farm loan association in excess of the powers herein granted or any limitations thereon. "Funds transmitted to farm loan associations by Federal land banks to be loaned to its members shall be in current funds, or farm loan bonds, at the option of the borrower." Pozvers of federal land banks. The powers of federal land banks are summarized in Sec. 13 of the law as follows : "Sec. 13. That every federal land bank shall have power, subject to the limitations and requirements of this act — "First. To issue, subject to the approval of the Federal Farm Loan Board, and to sell farm loan bonds of the kinds authorized in this act, to buy the same for its own account, and to retire the same at or before maturity. "Second. To invest such funds as may be in its possession in the purchase of qualified first mortgages on farm lands situated within the federal land bank district within which it is organized or for which it is acting. "Third. To receive and to deposit in trust with the farm loan registrar for the district, to be by him held as collateral security for farm loan bonds, first mortgages upon farm land qualified under sec- tion 12 of this act, and to empower national farm loan associations, or duly authorized agents, to collect and immediately pay over to said land banks the dues, interest, amortization installments and other sums pay- able under the terms, conditions, and covenants of the mortgages and of the bonds secured thereby. "Fourth. To acquire and dispose of — "(a) Such property, real or personal, as may be necessary or con- venient for the transaction of its business, which, however, may be in part leased to others for revenue purposes. "(b) Parcels of land acquired in satisfaction of debts or pur- chased at sales under judgments, decrees, or mortgages held by it. But 1099 no such bank shall hold title and possession of any real estate pur- chased or accjuired to secure any debt due to it, for a longer period than five years, except with the special approval of the Federal Farm Loan Board in writing. "Fifth. To deposit its securities, and its current funds, subject to check, with any member of the Federal Reserve System, and to re- ceive interest on the same as may be agreed. "Sixth. To accept deposits of securities or of current funds from national farm loan associations holding its shares, but to pay no in- terest on such deposits. "Seventh. To borrow money, to give security therefor, and to pay interest thereon. "Fighth. To buy and sell United States bonds. "Ninth. To charge applicants for loans and borrowers, under rules and regulations promulgated by the Federal I'arm Loan Board, reasonable fees not exceeding the actual cost of appraisal and de- termination of title. Legal fees and recording charges imposed by law in the State where the land to be mortgaged is located may also be in- cluded in the preliminary costs of negotiating mortgage loans. The borrower may pay such fees and charges or he may arrange with the federal land l)ank making the loan to advance the same, in which case said expenses shall be made a i)art of the face of the loan and paid off in amortization payments. Such addition to the loan shall not be per- mitted to increase said loan above the limitations provided in sec- tion 12." Rrstrictions on federal land banks. The following restrictions which the law places on federal land banks are definitely set forth in Sec. 14. "Sec. 14. That no federal land l)ank shall have power — "First. To accept deposits of current funds payable upon de- mand except from its own stockholders, or to transact any banking or other business not expressly authorized by the provisions of this act. "Second. To loan on first mortgages exce])t thrcugh national farm loan associations as provided in section 7 and section 8 of this act, or through agents as provided in section 15. "Third. To accept any mortgages on real estate except first mortgages created subject to all limitations imposed by section 12 of this act. and those taken as additional security for existing loans. "Fourth. To issue or obligate itself for outstanding farm loan bonds in excess of twenty times the amount of its capital and surjilus, or to receive from any national farm loan association additional mort- gages when the principal remaining unpaid upon mortgages already received from such as.sociation shall exceed twenty times the amount of its capital stock owned by such association. ^ "Fifth. To demand or receive, under any form or pretense, any commission or charge not specifically authorized in this act." Agents of federal land banks. After the act has been in efTect for a vcar federal land banks aie authorized to make loans on farm lands through agents approved by the Federal Farm Loan Board whenever 1100 it appears that national farm loan associations have not been formed and are nQt likel}' to be formed in any locality because of peculiar local conditions. Loans made through agents are subject to the same conditions and restrictions as if they were made through national farm loan asso- ciations ; but no agent may be employed other than a duly incorporated bank, trust company, mortgage company or savings institution char- tered by the state in which it has its principal office. Federal land banks may pay such agents the actual expenses con- nected with making loans ; such expenses become part of the loan and are paid off in amortization payments. In addition, agents may be allowed a commission not to exceed one-half of one per cent per an- num upon the unpaid principal of the loan. Such commission is to be deducted from dividends payable to the borrower on his stock in the federal land bank. Agents must indorse and become liable upon mortgages received from them and such mortgages may not exceed ten times the amount of the agent's capital and surplus. They may further be required to collect and remit payments on loans without charge. Whenever the district represented by any agent is adequately served by national farm loan associations no further loans may be negotiated therein by agents. Bonds of federal land banks. While the government does not guarantee the bonds of the federal land banks, they are issued under the supervision of the government and cannot be issued until the gov- ernment authorities have passed upon the security and satisfied them- selves that each dollar of bonds issued is secured by at least two dollars worth of land, and each bond contains on its face a certificate of its regularity signed by the Federal Farm Loan Commissioner, a govern- ment official. In addition they are secured by the 5 per cent stock owned by each farmer borrower, and held as collateral security by the local loan associations, and if that is not sufficient, there is the ad- ditional 5 per cent liability against each farmer stockholder ; moreover, the local farm loan associations are required to indorse every loan made to its members by the federal land bank. The bonds are also backed by the resources of the 12 federal land banks now established in the United States. The wide distribution of the security, unaffected by local conditions in any part of the nation, contributes greatly to its value and stability ; for, as a matter of fact, the farm loan bonds are backed by at least twice their face value, plus, the indorsement of the national farm loan associations, plus the resources of the 12 federal land banks located throughout the country. Joint Stock Land Banks. Differentiated from federal land banks. The joint stock land banks are organized under section 16 of the federal farm loan act. These joint stock banks are private institutions intended for the invest- ment of private capital but they are supervised by the Federal Farm 1101 Loan Board and inspected by its examiners, and appraisals made by them in placing first mortgage loans are likewise under the control of the board. They have no conncciiiai with the federal land banks and are distinguished from them as being cooperative associations of lenders : u horeas. the national farm loan associations and the federal land banks operate as cooperative associations of borrowers. The act provides that private individuals may organize joint stock land banks with capital stock of at least $250,000 each, and consisting of not less than 1(» stockholders. One-half of the stock is to be paid up when the bank starts business, and* the other half is subject to call. The shareholders are individually responsible, ec|ually and ratably, and not one for anoiher. to the extent of the par value of tlic stock owned by them and in addition to the amount paid in and represented by their shares. The joint stock bank has the right to issue bonds after its capital is fully ])aid up. just as the federal land banks do, but it may not issue bonds aggregating more than fifteen times the amount of its capital and surplus. Nothing but a first mortgage may be utilized as security for an issue of bonds, -\fter the mortgage loans are made they are deposited with the registrar of the federal land bank district, who for- wards them to the Federal Farm Loan Board at Washington for ap- proval. When the loans have been aj)proved the board issues joint stock land bank bonds to the liank which deiiosited the loans. The sale of these bonds furnishes additional ca]Mtal for further loans. The joint stock bank may make mortgage loans at a rate of 1 per cent per annum above the rate which its last issue of bonds bears, but they are not permitted to charge over fi per cent interest. Joint stock banks operate under the amortization plan, the same as the federal land banks. Except as otherwise provided in the law. joint st(K-k land banks have the same general powers and limitations as federal land batiks, but they are specifically exempt from a number of provisions applic- able to federal land banks. The main difference in the regulation and supervision of the two institutions arises from the fact that one is a cooperative association of borrowers and the other a cooperative asso- ciation of lenders. Farm loans made bv the joint stock land banks. The following tables show the loans made by joint stock land banks now operating under the federal act. The different banks are arranged in order ac- cording to priority of organization. This arrangement presents the chronological as well as the geographical development of the joint stock banks throughout the country. The joint stock l)anks may make loans on agricultural land only in the state in which they are located and one adjoining state. 1102 o eo LO O CO to iM eo O o, o ►-< •_2 Os rt >-s N ^ CI 1-1 a ""n bt u ^ o o ^ 02 e c3 o o o o c- o ooooc;oooir3ocvooooooooo ooLfiLsoooociot-ooooini^odo m CO o ai T-icqc-iffloocc-^OL.OL.-tm-^oct-Ln-^u^rtt-toc-c-c^iT-i-^ 00S^00C5THC>0C m S C c c rt .2 CO CO m ^H o C g -3 -< Ul [ 1 -73 rt T5 a, CO OS rrt ro CO CO Co CO c -t! OJ rt > l-l ^ u Ui^< ^.2^ ^ -c ^ -c 2; c«3 rt o ^ .c o c CO o So .5^ 5 CO CO rt C O ^ i 5 S -i ^ ^ C z: C S rt ;3 rt C rt cS 1^ ^2 c a> c c3 C ■— C3 03 -g, rt -3 3 c o 03 -3 o3 u x: S •is Uw o P b£. :_ ^ .22 S to ~ -- « ^ t-- ^ ^u: — a; - g. C C t-5 o -^ cs o o3 =^ CO C- c3 a CO QJ H^ to > »5 § i£ rt _^ j^ 2; ?•; ^ ;:: to '^ 5 03 ^ .E-i ^ to j^ .-c 2> H- to o3 o! -SSi'S^ ?i o.'o .S .-^^ _^i ^ ^ c 5 -a -2 ^ S^ m fl So 1^ « (1) 1-1 ^^ (-« J3 p^ ^ ^j ^2 M^ o C3 .S fi o3 — c "-i o o t; a o CO t- -C — < ^ Q^ c3 -sec ■- ci := P5 03 CC rrj CO to ^ o3 n: l2 CO J-H C ■^ £f ^'. ^- '«^ a cs o3 O J3 i^t-U C C3 =3 n o3 e 03 ■2 =« c5 .— 'S c ~^ — . 03 " c I m S-g SJ^^ P TT 03 -^ C J ■ '-' -^ . • o ?^ ■ ^ - 03 1-5 -e ^.ix! 0«2i C.S 2 eg 03 >-; o fi .s «2 •" — '-' '"' a "? >. CO CO *j CO fl 2.^^ ->j *j — 03 .« .9 ^ CO O O 5.S^ fl O o tH 1-5 1-: CO C O ^ r ■x =^ S -^ t;? -^ w u; i— ,^ _;^ " jS<; CO CO C jcnfcfe^; C X o CLh o3 *j .^ 0) c o H oi § CI O Ol tH cc 03 Lh ^ feOfc o «^ O.S o ■ rt§ •- ^ c 2 c i •== 5 -r 5^ t- 5 o o •" o oo>m J ^ a: o 2 " c 2 '^ 2'S ^ c ^ ^ C . • - ^ -H J ^ C . .-H § 2aj i: 1^ 02 . o 03 1-5 M -kJ CD -tJ c -^ -^ .£ O 3 ^ C 1-5 O 03 1-: CO •;:; O CO O ^ +j ^ .5 £ >> tc^ Cl< ^- 1^ .2 - :t: c^i •— g CO "3 03 ,«S .- 1103 Consolidated Statement of Condition of the Joint Stoek Land Banki- at the Close of Business October 5/, 79/9. * ASSETS. Mortgage Loans ^^'^-^-I'^.-'J^-l^ Plus Accrued Interest o.!>u Subtotal 48.308.S32. 63 Less-Aniortlzation payments 216.016.10 Net Mortgage Loans $48.092,816 . 53 V. S. Government Bonds and Securities 8.486,879.49 Accrued Interest on V. S Honds. ,,,*I'.,!'.; "..n Farm Loan Uonds on Hand (unsold) vll-' o^-^^ Cash on Hand and in Banks 3.41o.938.40 Banking House -IK^^-sS Furniture and Fixtures r^^ij-nn Accounts Receivable -r ".'c , ' „" (0.461. 95 Other Assets Total Assets $62.9 IT. 08.'). 39 LIABILITIES. Capital Stock Paid in * "■?-:*]?-«!! Surplus Paid in H-'H'ia^ Reserve .i;>. j.i i . ha Farm Loan Bonds Authorized ■'?'jio^?ll^ oo Reserved for Interest on Farm Loan Bonds 1'aac'I .• •? Bills Pavable (Money and Bonds borrowed) "'nc .-ij nJ Accounts Payable ^■2c--i7o ' 25 Other Liabilities Jba.b /., .h-» Excess of Earnings over Expenses and Interest Charges 33.360.96 $62,917,085.39 Amortization Plan of the Federal System, Loans niadc by federal land banks or by joint stock land banks must be made on the amortization plan and no mortgage made on any other plan can he accepted as a basis for any issue of farm loan bonds. This process of paying off an indebtedness by installment pay- ments of a fixed amount, which includes interest and a i)art of the principal, throughout a period of years, enables a farmer to take 3 large loan without undue risk. Under the federal plan of amortiza- tion a mortgage loan may run from o to 40 years at the option of the borrower. The payment of the interest rate and 1 per cent addi- tional per year applied on tbe jirincipal will wipe out the mortgage in about 30 years. Tbis period may be shortened by making additional payments on the principal, from time to time, as the farmer may find it convenient. The amortization payments may be made annually or semi- annually, but the semi-annual system has been adopted as the stand- ard, ^as it is usually an easier method for a farmer operating a small farm. Thus, tbe semi-annual payment on a $1,000 mortgage for ^C^ vears at 5 per cent wouUl require a payment of $:{0 every Gnionths. This pavment would wipe out the mortgage and discharge it at the end of tile thirty-six year period. The farmer always has the privilege of making additional payments after the mortgage has run for a per- iod of 5 years. After that time he can wipe out his loan in whole or in part on any interest pay day. 1104 Amortisation methods of the federal land hanks and the joint stock land banks. The amortization methods of the land banks under the federal system have been standardized, so that it is very easy to make these payments to the land bank from which the" loan has been taken. The following table shows the application of succeeding instal- ments in the payment of interest and principal until the entire in- debtedness is amortized. [A loan of $1,000 at ^ per cent interest repayable in .35 years as compared with loan for tbe same amount and period of loan.] a Straight Amortization loan. Straig-ht loan. Payment Number. Install- ment. Interest. Applied on prin- cipal. Principal still unpaid. Interest. Principal still unpaid. 1 $65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 62 50 $55 00 54 45 53 87 53 26 52 61 51 93 51 21 50 45 49 65 48 81 47 92 46 98 45 99 44 94 43 84 42 68 41 45 40 15 38 79 37 34 35 82 34 22 32 52 30 74 28 85 26 87 24 77 22 56 $10 00 10 55 11 13 11 74 12 39 13 07 13 79 14 55 15 35 16 19 17 OS 18 02 19 01 20 06 21 16 22 32 23 55 24 85 26 21 27 66 29 18 30 78 32 48 34 26 .36 15 38 13 40 23 42 44 . $990 00 979 45 968 32 956 58 944 19 931 12 917 33 902 78 887 43 871 24 854 16 836 14 817 13 797 07 775 91 753 59 730 04 705 19 678 98 651 .32 622 14 .591 36 558 88 524 62 488 47 450 34 410 11 367 67 322 89 275 65 225 81 173 23 117 76 59 24 $55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 65 00 55 00 55 09 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 55 00 $1,000 2 1,000 3 1,000 4 . 1,000 5 1,000 6 1,000 7 1.000 8 1. 000 9 1 , 000 10 1.000 11 1,000 12 1.000 13 1,000 14 . 1.000 15 1.000 16 1,000 17 1.000 18 1 . 000 19 1.000 20 1,000 21 1,000 22 . 1.000 23 1.000 24 1,000 25 1,000 26 1 . 000 27 1,000 28 1.000 29 20 22 ' 44 78 1 , 000 30 17 76 15 16 12 42 9 53 6 48 3 26 47 24 49 84 52 58 55 47 58 52 59 24 1,000 31 . ... . 1 . 000 32 1 , 000 33 . 1.000 34 1,000 35 1.000 $2,272 50 $1,272 50 $1,000 00 $1,925 00 $1,000 Comparison at the end of 35 years; Under straight loan plan— 35 interest payments of $55 each $1,925 00 Principal unpaid 1.000 00 $2,925 00 Under amortization plan — 35 installments, as agreed, paying: both interest and principal $2,272 50 Saving $652 50 The following method of paying oflf ahead of time has recently been promulgated by the Federal Farm Loan Board. Its advantages are perfectly plain to any borrower. The regular amortization table 1105 can be used during the entire period covered by the mortgage without any puzzhng problem in arithmetic. In the present case, the loan is paid otT in '■il years instead of 3.'). The amount of interest paid is reduced from $1. "^72.50. under the regular amortized 3o-year loan, to $TG8.T8, or a saving of $503.72 in interest. [A 35-year8. amortization loan of $1,000 at 5i per cent interest, but with the privilesre of repaying succeeding sums that would be regularly applied on the principal 1 Payment Number. Install- ment. Interest. Applied on prin- cipal. Principal siiil unpaid. Addi- tional payment. Principal still unpaid. 1 $65 00 65 00 65 00 66 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 65 00 62 50 $55 00 54 45 53 87 53 26 55 61 49 65 48 81 47 92 46 98 43 84 42 68 41 45 34 22 32 52 26 87 24 77 22 56 15 16 12 42 6 48 326 $10 00 10 55 11 13 11 74 12 39 15 35 16 19 17 08 18 02 21 16 22 32 23 55 30 78 32 48 38 13 40 23 42 44 49 84 52 58 58 52 59 24 $990 00 979 45 968 32 956 58 944 19 887 43 871 24 854 16 836 14 775 91 753 59 730 04 591 36 558 88 450 34 410 11 367 67 225 81 173 23 59 24 t 3 4 5 $ 41 41 $902 78 6 (9) 887 43 871 24 8 854 16 9 39 07 797 07 10 (15) 775 91 11 753 59 12 107 90 622 14 13 (•>«) 591 36 H 70 41 488 47 15 (26) 450 34 16 410 11 17 92 02 275 65 18 (31) 235 81 19 55 47 117 76 80 (34) 59 24 21 $788 78 $593 72 $406 28 Application of amortization and interest payments. The law makes the following provision for the application of amortization and interest payments collected on pledged mortgages held in trust : Amortization and other payments on the principal of first mort- gages held by a farm loan registrar as collateral security for the issue of farm loan bonds constitute a trust fund in the hands of the federal land bank or joint stock land bank receiving the same, and must be applied as follows: In the case of a federal land bank — (a) To pay off farm loan b(mds issued by said bank as they mature. (b) To purchase at or below par farm loan bonds issued by said bank or by any other federal land bank. (c) To loan on first mortgages on farm lands within the land bank district, qualified under this act as collateral security for an issue of farm Joan bonds. (d) To purchase United States government bonds. In the case of a joint stock land bank — (a) To pay off farm loan bonds issued by said bank as they mature. (b) To purchase at or below par farm loan bonds. (c) To loan on first mortgages qualified under section 16 of this act. 1106 (d) To purchase United States government bonds. The farm loan bonds, first mortgages, United States government bonds, or cash constituting the trust fund aforesaid, are forthwith to be deposited with the farm loan registrar as substituted collateral security in place of the sums paid on the principal of indorsed mort- gages held by him in trust. Every federal land bank, or joint stock land bank, is required to notify the farm loan registrar of the disposition of all payments made on the principal of mortgages held as collateral security for an issue of farm loan bonds, and the registrar is authorized at his discretion, to order any of such payments, or the proceeds thereof, wherever deposited or however invested, to be immediately trans- ferred to his account as trustee aforesaid. Investments in Farm Loan Bonds. Provisions ;:afcguarding investments. Investments in farm loan bonds by the farming population of the country, and by thrifty in- vestors generally, are made attractive by the many safeguards which the law provides in their issue. The following sections indicate that the act gives as careful consideration to safeguarding the interests of investors as it does in promoting the welfare of borrowers : "Application for farm loan bonds. Sec. 18. That any federal land bank, or joint stock land bank, which shall have voted to issue farm loan bonds under this act, shall make written application to the Federal Farm Loan Board, through the farm loan registrar of the district, for approval of such issue. With said application said land bank shall tender to said farm loan registrar, as collateral security, first mortgages on farm lands qualified under the provisions of sec- tion 12, section 15, or section 16 of this act, or United States govern- ment bonds, not less in aggregate amount than the sum of the bonds proposed to be issued. Said bank shall furnish with such mortgages a schedule containing a description thereof and such further infor- mation as may be prescribed by the Federal Farm Loan Board. "Upon receipts of such application said farm loan registrar shall verify said schedule and shall transmit said application and said schedule to the Federal Farm Loan Board, giving such further in- formation pertaining thereto as he may possess. The Federal Farm Loan Board shall forthwith cause to be made such investigation and appraisement of the securities tendered as it shall deem wise, and it shall grant in whole or in part, or reject entirely, such application. "The Federal Farm Loan Board shall promptly transmit its de- cision as to any issue of farm loan bonds to the land bank applying for the same and to the farm loan registrar of the district. Said registrar shall furnish, in writing, such infonnation regarding any issue of farm loan bonds as the Federal Farm Loan Board may at any time require. 1107 "No issue of farm loan bonds shall l^e authorized unless the Federal Farm Loan Board shall approve such issue in writing. "Issue of farm loan bonds. Sec. 1!>. That whenever any farm loan ref^^istrar shall receive from the Federal Farm Loan Board no- tice that it has approved any issue of farm loan bonds under the provisions of section l:^ he shall forthwith take such steps as may be necessary, in accordance with the provisions of this act. to insure the prompt execution of said bonds and the delivery of the same to the land bank applying^ therefor. "Whenever the Federal Farm Loan Board shall reject entirely any application for an issue of farm loan bonds, the first mortgages and bonds tendered to the farm loan registrar as collateral security therefor shall be forthwith returned to said land bank by him. "Whenever the Federal Farm Loan Board shall approve an issue of farm loan bonds, the farm loan registrar having the custody of the first mortgages and bonds tendered as collateral security for such issue of bonds shall retain in his custody those first mortgages and bonds which are to be held as collateral security, and shall return to the bank owning the same any of said mortgages and bonds which are not to be held by him as collateral security. The land bank which is to issue said farm loan bonds shall transfer to said regis- trar, by assignment, in trust, all first mortgages and bonds which are to be held by said registrar as collateral security, said assignment providing for the right of redemption at any time by payment as provided in this Act and reserving the right of substitution of other mortgages fpialified under sections 12, lo, and 1(5 of this act. Said mortgages and bonds shall be deposited in such deposit vault or bank as the Federal h^arm Loan Board shall approve, subject to the con- trol of said registrar and in his name as trustee for the bank issuing the farm loan bonds and for the prospective holders of said farm loan bonds. "Xo mortgage shall be accepted by a farm loan registrar from a land bank as part of an offering to secure an issue of farm loan bonds, either originally or by substitution, except first mortgages made subject to the conditions prescribed in said sections 12, 15. and HJ. "It shall be the dutv of each farm loan registrar to see that the farm loan bonds delivered by him and outstanding do not exceed the amount of collateral security i)ledged therefor. Such registrar may, in his discretion. tem|)orarily accept, in place of mortgages withdrawn. United States government bonds or cash. "The Federal I-'arm Loan Board may. at any time, call upon any land bank for additional security to protect the bonds issued by it. "Form of farm loan bonds. Sec. 20. That bonds provided for in this act shall be issued in denominations of •$•?.'). $r)0. $100. .^.'iOO. and $1,000; they shall run for specified minimum and maximum periods, subject to j)ayment and retirement, at the option of the land bank, at any time after five years from the date of their issue. They shall have interest coupons attached, payable semi-annually, and shall be issued in series of not less than $00,000. the amount and terms to be fixed by 1108 the Federal Farm Loan Board. They shall bear a rate of interest not to exceed 5 per centum per annum. "The Federal Farm Loan Board shall prescribe rules and regula- tions concerning the circumstances and manner in which farm loan bonds shall be paid and retired under the provisions of this act. "Farm loan bonds shall be delivered through the registrar of the district to the bank applying for the same. "In order to furnish farm loan bonds for delivery at the federal land banks and joint stock land banks, the Secretary of the Treasury is hereby authorized to prepare suitable bonds in such form, subject to the provisions of this act, as the Federal Farm Loan Board may ap- prove, such bonds when prepared to be held in the treasury, subject to delivery upon order of the Federal Farm Loan Board. The engraved plates, dies, bed-pieces, and so forth, executed in connection therewith shall remain in the custody of the Secretary of the Treasury. Any ex- penses incurred in the preparation, custody, and delivery of such farm loan bonds shall be paid by the Secretary of the Treasury from any funds in Tfie treasury not otherwise appropriated : Provided, however, that the Secretary shall be reimbursed for such expenditures by the Federal Farm Loan Board through assessment upon the farm land banks in proportion to the work executed. They may be exchanged into registered bonds of any amount, and re-exchanged into coupon bonds, at the option of the holder, under rules and regulations to be prescribed by the Federal Farm Loan Board. "Special provisions of farm loan bonds. Sec. 21. That each land bank shall be bound in all respects by the acts of its officers in signing and issuing farm loan bonds, and by the acts of the Federal Farm Loan Board in authorizing their issue. "Every federal land bank issuing farm loan bonds shall be primar- ily liable therefor, and shall also be liable, upon presentation of farm loan bond coupons, for interest payments due upon any farm loan bonds issued by other federal land banks and remaining unpaid in con- sequence of the default of such other land banks ; and every such bank shall likewise be liable for such portion of the principal of farm loan bonds so issued as shall not be paid after the assets of any such other land banks shall have been liquidated and distributed : Provided, that such losses, if any, either of interest or of principal, shall be assessed by the Federal Farm Loan Board against solvent land banks liable therefor in proportion to the amount of farm loan bonds which each may have outstanding at the time of such assessment. "Every federal land bank shall by appropriate action of its board of directors, duly recorded in its minutes, obligate itself to become liable on farm loan bonds as provided in this section. "Every farm loan bond issued by a federal land bank shall be signed by its president and attested by its secretary, and shall contain in the face thereof, a certificate signed by the Farm Loan Commis- sioner to the effect that it is issued under the authority of the Federal Farm Loan Act, has the approval in form and issue of the Federal Farm Loan Board, and is legal and regular in all respects ; that it is 1109 not taxable by national, state, municipal, or local authority; that it is issued against collateral security of United States government bonds, or indorsed first mortgages on farm lands, at least equal in amount to the bonds issued : and that all federal land banks are liable for the payment of each bond." 1110 IV. OTHER FIRST MORTGAGE SYSTEMS. State systems. Most of the states that have developed farm loan systems have shown a tendency to follow the federal law in its general outlines. The majority of the states accordingly limit their loans to about 50 per cent of the value of the land, and make no pro- vision for second mortgages. In a number of cases, the states follow the federal system so closely that the net result is duplicated machinery for accomplishing the same purpose. It has been urged that the states should develop systems that would supplement the federal system and that the state farm loan bureaus are in a peculiarly advantageous position to advance loans on second mortgages because they are in a position to check up local con- ditions ai'ka to make such loans without undue risk. But whatever reasons have been urged for or against existing methods, the fact re- mains that present state systems frequently duplicate work done by the Federal Loan Board. The South Dakota constitution provides that "the State or any county or two or more counties jointly may establish and maintain a s)^stem of rural credits and thereby loan money and extend credit to the people of this State upon real estate security in such manner and upon such terms and conditions as may be prescribed by general law." . . . (Art. 13, Sec. 1.) Under this provision a rural credit system was enacted in South Dakota in 1917. (Rev. Code 1919, Sees. 10. 150-10, 173.) And within a two-year period a little more than $10,000,000 was loaned on the farm lands of that state. The South Dakota law limits the amount that can be loaned to 70 per cent of the appraised value of the land and 40 per cent of the in- sured value of the improvements. The maximum amount that can be loaned to any one person is $10,000. The interest rate for farm mort- gage loans varies from 5^^ to 6 per cent. Under the amortization plan of paying the principal, the borrower actually pays 7.26 per cent an- nually, in two semi-annual payments on the 6 per cent basis, and 6.88 per cent on the 5^ per cent basis. Payment at this rate for a period of 30 years pays all the interest and wipes out the principal. A borrower may pay all or any part of his loan on any interest date after 5 years. There are no commissions of any kind to be paid for securing loans and the borrower gets all the money he borrows ; none being retained for stock in the farm land bank, as is the case under the federal sys- tem. No liability is incurred by the borrower except for his own loan. In case the borrower is unable to meet the interest payments when due, the Farm Loan Board may, in its descretion, defer these payments for 1111 a reasonable length of time. The interest charge on all overdue pay- ments is 8 per cent. Money loaned under this law may be used for any of the following purposes: (1) To purchase farm land; (2) to purchase equipment, fertilizers, etc.. for the proper and reasonable operation of the mort- gaged land; {',^) for buildings and other improvements on the land; (4) for paying mortgages or other indebtedness incurred for the pur- poses provided for in the law. The South Dakota law follows the general plan of the federal act. It has the same general purpose, and it operates practically in competi- tion with the federal farm loan system. Amendments to the constitution of North Dakota adopted in 1918 opened the way for the development of state farm loans. Sections 182 and 185 as amended provide the basis for the state farm loan system. Sec. 182, as amended in IWIS: "The state may issue or guarantee the payment of bonds, provided that all bonds in excess of $2,000,000 shall be secured by first mortgages upon real estate in amounts not to exceed one-half of its value; or upon real and personal projierty of state-owned utilities, enterprises, or industries, in amounts not exceed- ing its value, and provided further, that the state shall not issue or guarantee bonds upon the property of state-owned utilities, enterprises or industries in excess of $10,000,000. "Xo future indebtedness shall be incurred l)y the state unless evi- denced by a bond issue, which shall be authorized by law for certain purposes, to be clearly defined. Every law authorizing a bond issue shall provide for levying an annual tax, or make other provision, suffi- cient to pay the interest semi-annually, and the i)rincipal within thirty years from the passage of such law. and shall specially ai)propriate the proceeds of such tax. or of such other provisions, to the payment of saifl principal and interest, and such approj)riation shall not be re- pealed nor the tax or other provisions discontinued until such debt, both principal and interest, shall have been paid. Sec. IS,") as amended in 1918: "The state, any county or city may make internal imjjrovements and may engage in any industry, enter- prise or i)usiness not prohibited by .Article 20 of the Constitution, but neither the state nor any political subdivision thereof shall otherwise loan or give its credit or make donations to or in aid of any individual, association or corporation except for reasonable support of the poor. nor subscribe to or become the owner of capital stock in any association or corporation." Pursuant to the authority granted in these amendments to the con- stitution the state legislature in 1911) established the Bank of North Dakota and also made provision for the issue of real estate bonds based on first mortgages. The distinguisliing feature of the North Dakota law is the state bank which performs jiractically the same functions for the state farm loan system that are performed in the federal system by the federal land bank. Although the bank did not begin business until July 2Sth, 1919. on December (Jth of that year it had made loans aggregating 1112 $1,700,000. Additional loans amounting to $1,300,000 had been ap- proved subject to the borrower furnishing a merchantable title. In construing section 182 of the constitution as amended, the Su- preme Court of the state held that the language of the amended section authorized the issue of $2,000,000 of bonded indebtedness, unsecured except by the faith and credit of the state, in addition to any bonded indebtedness existing at the time of its adoption. (State v. Hall, 173 N. W. 763 (1919). This decision of the Supreme Court, given in mandamus proceedings against the secretary of state to compel him to certify the bonds as within the debt limit, settled the question as to the validity of the bonds, and left the way open for putting the rural credit laws into practical operation. The state of Oregon adopted a constitutional amendment provid- ing for rural credits in 1916. It furnishes a typical example of legis- lative details embodied in a state constitution, and reads as follows : "Constitution, article XI a, Rural Credits, Sec. 1. Notwithstand- ing the limitations contained in Section 7 of Article XI of this constitu- tion, the credit of the state may be loaned and indebtedness incurred to an amount not exceeding two per cent of the assessed valuation of all the property ii^the state for the purpose of providing funds to be loaned upon tire security of farm lands within the state, subject to the limitations herein contained. "Sec. 2. The governor, secretary of state, and state treasurer shall constitutute the state land board, which board is hereby authorized and directed to issue and sell or pledge bonds in the name of the state to be known as Oregon farm credit bonds in an amount not to exceed said two per cent of the assessed valuation of all the property in the state, and to place the proceeds in the state treasury in a fund to be known as, the "rural credits loan fund." "Sec. 3. Said bonds shall be issued in denominations of $25.00, $100.00, $500.00, and $1,000.00, and shall be issued in series of $50,- 000.00, or multiples thereof, drawn to mature in not more than thirty- six years. They shall bear interest at the rate of four per cent per annum and shall be exempt from all taxes levied by the state of Ore- gon, or any of its subdivisions. "Sec. 4. Said state land board is authorized and directed to loan the moneys in said rural credits loan fund to owners of farm lands in Oregon upon notes secured by mortgages or deeds of trust consti- tuting first liens on such farm lands in amounts which shall not exceed fifty per cent of the value of such lands, nor $50.00 per acre on such lands, nor less than $200.00 nor more than $5,000.00 to any individual. If pending applications shall at any time exceed the funds available, preference shall be given to loans not exceeding $2,000.00 in amount. "Sec. 5. Such loans shall not be made except to owners who oper- ate and occupy the lands mortgaged, and shall be made only for the following purposes : (a) The payment for lands purchased ; (b) the purchase of livestock and other equipment, and the making of im- provements which, in the judgment of said board, will increase the productivity of such lands or add to their value as a farm home in a 1113 degree to justify such expenditure; and (c) for the satisfaction of encumbrances upon such lands, which, in the judgment of said board, were incurred or assumed by said apphcant for the aforesaid purposes. "Sec. ti. Every apphcant for a farm loan shall state clearly in his application the purposes for which such loan is desired, and upon its approval by the board this statement shall be deemed a part of the note or contract under which the loan is granted. But no failure to apply such funds to the purposes stated in such application or enumer- ated herein shall invalidate a loan when once made, nor shall anything herein contained be deemed to prevent any farm owner from selling or leasing lands subject to such encumbrance; but if he shall violate his said contract by ai)plying the moneys borrowed to purjwses other than those stated in his application or enumerated herein, or if he shall lease such lands or sell them to any person not fulfilling the conditions and purposes provided for herein, said board is authorized and directed to re([uire the repayment of said loan upon six months notice, and said note or contract shall contain a clause providing therefor. "Sec. 7. Such loans shall^be repaid with interest accruing in semi- annual or annual instalments on the amortization plan, such instalments being fixed at such sums as will cover the interest rate and will li(|uitlate the debt in a period to be agreed on between said board and the applicant, such period to be not less than ten nor moie than thirty- six years ; but any debtor may licjuidate any part or all of his indebted- ness in anKumts of $50.00 or multiples thereof upon any amortization payment date. "Sec. 8. The rate of interest on loans shall be 5 per cent per annum, provided that in case any series of said farm credit bonds is sold at an average of less than par, the board may charge upon such farm loans as are made from the proceeds of the series so st)ld below par a rate of interest in excess of o per cent, but which shall not exceed by more than 1 per cent the rate which the state must pay for the funds actually obtained from the disposal of its said bonds. The board, however, shall require each ajiplicant to pay an initial charge of 1 per cent of the loan granted, the mininnmi charge to be $10.00 to cover the cost of appraisal and examination of title. "Sec. 1). All surplus funds accruing from the operation of the system of rural credits herein provided for, after paying interest accru- ing on tlie aforesaid bonds, and all operating and other expenses aris- ing from the administration of said system of rural credits, shall be placed in the state treasury and become a part of a fund to be known as the 'rural credits reserve fund.' Said rural credits reserve fund shall be loaned on farm lands in the manner herein provided for the rural credits loan fund, and the interest accruing from loans made from said rural credits reserve fund shall be added to it and become part of it. The said rural credits reserve fund shall be irreducible ex- cept that it may be drawn upon to reimburse the state for loss incurred in the administration of said system of rural credits. "Sec. 10. The legislative assembly shall provide in such detail a3 it shall deem advisable for the carrying out and administering of the 1114 provisions of this amendment, and shall provide adequate safeguards against the use of such loans as an aid to the purchasing and holding of lands for purposes of speculation. Such safeguards shall include clear definitions of the terms 'operate' and 'occupy' used herein. In the absence of such legislation, and subject to the same after its enact- ment, the state land board shall proceed to administer said system of rural credits under rules and regulations provided by itself, but subject to the provisions herein contained. "Sec. 11. The provisions of the constitution and laws of Oregon in conflict with this amendment are hereby repealed insofar only as they conflict herewith. The provisions of this amendment shall be self- executing, and shall take effect and be in operation sixty days after their approval and adoption by the people of Oregon." A number of states that have no specific constitutional provision for rural credit systems, have authority to invest state funds in first mortgage loans on farm lands. The constitution of Minnesota as amended in 1916, provides that the permanent school and university fund of the state may be invested in "first mortgage loans secured upon improved and cultivated farm lands." (Art. 8, ^^. 8.) Such loans may not exceed 30 per cent of the actual cash value of the land mortgaged. No legislation to carry out this provision has been attempted. In Arizona a constitutional provision requiring the state treasurer to keep certain "moneys invested in safe interest-bearing securities" (Art. 10, Sec. 7) has likewise left the way open for loans, and in 1917 the Arizona legislature made provision for the investment of state funds in first mortgages on farm lands. The loans are made under regulations prescribed by the governor, secretary of state, and state treasurer, and the amount loaned on any farm may not exceed one- half of the actual valuation. The farm loan system in Oklahoma is closely connected with the administration of state and school lands. Under article 11, section 6 of the constitution, provision is made for investing permanent common school and other educational funds in first mortgages upon good and improved farm lands. Loans are limited to 50 per cent of the reason- able value of the lands without improvements. In 1919 the legislature made provision for county loan boards, and further prescribed the conditions upon which loans could be authorized on first mortgage security, and also the manner of procuring second mortgages from the home loan fund. Legislation enacted in Montana in 1915, Chap. 28 and in 1917, Chap. 184 (amended in 1919, chap. 174) makes pi-ovision for farm loans on improved farm land, from moneys belonging to the state permanent common school funds and all other permanent state, educational, charitable, and penal institution funds. Applications for loans on farm lands from the state funds must be made to the secretary of the state board of land commissioners, on forms approved by the attorney-general, and it is the duty of the of the board of land commissioners to fill such applications as rapidly 1115 as such funds are available and in the order in which approved ab- stracts of title are received. Loans are to be secured by first mort- gage, and the amount of each loan is not to exceeil two-lifths of the actual cash value of the land. All mortjj^ages given to secure loans of funds on farm lands must be made in the name of the state as mortgat^ee. The interest rate is six per cent per annum payable an- nually to the register of state lands. The mortgages run for periods of not less than three nor more than ten years. In ihe case of mort- gages running for ten years the privilege of prepayment is given after three annual interest payments have been made. Examinations and appraisals are made under the direction of the board of land com- missioners. Expenses incurred in making examinations and ap- praising the land are paid out of the several income funds from which the loans are made, but the expenses of perfecting title are borne by the ai)plicant for the loan. The state land board may sell mortgage farm loans at public auction whenever there are applications on file for loans in excess of the amount of funds on hand for investment. None of the mortgages, nor the notes or obligations secured thereby may be sold for a less amount than the unpaid principal and interest accruing up to the date of sale. The state of Montana may never be held liable for the payment of any portion of the i>rincipal or interest of any mortgages, notes, or obligations, so sold, but the jmrchasers nuist look to the property on which the mortgages are given and to the makers thereof for the payment of the princii)al and interest. Whenever any mortgages on farm lands, together with the notes or obligations secured thereby, are sold and assigned by the state board of land commissioners, the purchaser may. in writing. ap|)oint the registrar of state lands as an agent, to whom the payment of the ])rincipal and the interest be- coming due thereon may be' paid, and it then becomes the duty of the register to receive payment of such i)rincii)al and interest and pay the same over to the holders or owners of such mortgages, notes and obli- gations. All moneys received from the sale of mortgages and notes, must be deposited in the state treasury and credited to the particular fund or funds from which the imestmcnts and loans were originally made, and may then in like manner be reinvested. A system of farm loans was developed in Maine under chapter .30:i. laws of l!»i: as amended by chapters 111 and 22'-\ laws of ]!>!!). Under this legislation farm loan commissioners are authorized to make investments in approved first mortgages on agricultural lands, from funds accruing from the sale or lease of public lands of the state. Under the soldier settlement law enacted in Maine in HMO (chap, isit) the "reserve land fund" is made available for carry- ing out the provisions for soldier settlement on lands of the state, and further |irovision is made that surplus lands may be oi)enefl to other settlers when not required for homes for soldiers. Most of the soldier settlement laws recently enacted make similar provisions for the settlement of surplus lands by others than soldiers, and likewise extend their other benefits to citizens generally when such benefits are available in excess of demands for soldiers. As these laws 1116 quite generally loan the credit of the state to prospective soldier settlers and others in the purchase of homes and farms, it will readily be seen that this type of land settlement legislation greatly extends the entire field of rural credit in the acquisition of farms by means of loans and advances made through various state agencies. Legislation enacted in 1919, that is typical of this general movement may be found in Arizona, California, Colorado, Maine, ]\Iissouri, New Mexico, Oregon, South Dakota, Tennessee, Utah, Washington, and Wyoming. This legislation assumes such a variety of forms that about the only com- mon ground found for all these widely varying laws is the common purpose of extending the aid of the state in the various plans for the settlement of soldiers and of others when surplus means are available. In some of the states the 1919 legislation is amendatory of former laws making provision for land settlement ; in such cases the new legislation generally gives soldiers the preference in settlement plans and extends the aid of the state in more substantial forms of credit than were previously available. A proposed amendment to the Kansas constitution relating to state aid in the purchase of farm homes will be submitted to the people of that state at the general election in 1920. (Kansas Laws 1919, p. 448.) The proposed-^mendment reads: "Art. 15, Sec. 11. To en- courage the purchase, improvements and ownership of agricultural lands and the occupancy and cultivation thereof, provision may be made by law for the creation and maintenance of a fund, in such man- ner and amount as the legislature may determine, to be used in the pur- chase, improvement and sale of lands for agricultural purposes. The legislature may provide reasonable preferences for those persons who served in the army and navy of the United States in the World War and holding an honorable discharge therefrom." In a number of the western states, the state constitution imposes but few restrictions on the business activities of the state government ; and frequently wide authority is granted to local governments to en- gage in business enterprises. This condition' of the fundamental law leaves a wide range for experimentation, and the state governments in a number of cases have developed rural credit systems, without the necessity of having the constitution rewritten in order to free them- selves of a particular limitation. The absence of constitutional restric- tions may also explain the greater number of farm loan systems and cooperative credit associations in the western half of the country. Where economic necessity and political desire unite in demanding a law, it is more readily obtainable if the constitution does not embody some particularized limitation which becomes obstructive in the course of the progress of the state. Foreign systems. The main features of rural credit s^^stems of different foreign countries were investigated by the commission sent abroad by the government of the United States to study and report upon rural credit legislation in 1913. The vast fund of valuable in- 1117 formation collected by this commission became the basis of the federal farm loan act.^ The federal act therefore reflects the farm loan experience of the civilized countries of the world, as the substance of the foreij^n law was digested and the portions deemed most practicable and applicable to conditions in this country were formulated into the present federal farm loan system. »U. S. Senate Documents Kos. 21i. 2G1. and 380. Sixty-tMrd Congress. 1118 V. SYSTEMS BASED ON SECOND MORTGAGES. A system based on second mortgages has been proposed in a num- ber of states in order to supplement the first mortgage system provided by the federal farm loan act. The objections most frequently urged against the federal farm loan system are that it makes no provisions for second mortgages and that the rate of 50 per cent loaned on the land and 20 per cent loaned on the improvements is inadequate to meet the needs of many farmers. It is further urged that where land values are high and are settled, amounts larger than $10,000 could safely be loaned, without undue risk to any interest involved. It has accordingly been urged that state systems should be limited to second mortgages so as to supplement the federal farm loan system, instead of merely duplicating its work. The federal systenfTTas been developed on the theory that the farm loan bonds must have so safe a basis of security back of them that there can be no question as to their value or stability, and so be readily sold throughout the country. On the other hand, bonds issued on second mortgages on lands within the limits of any one State would have adequate security where land values are high and conditions settled, as they are found in the rich farming lands of Illinois. A bill which was considered by the JMinnesota legislature in 1919, but was not enacted into law, made provisions for second mortgage loans on Minnesota farms. The bill authorized the issuance of certifi- cates of indebtedness of the state amounting to $1,000,000. The money so raised was to be used in making second mortgage loans on farms. The total percentage of loans by first and second mortgages combined was limited to 75 per cent of the value of the land and 30 per cent of the value of the permanent improvements. A number of agricultural experts have pointed out that the up- ward limit for mortgage loans to any one person could readily be raised from $10,000 to $20,000 through the addition of state second- mortgage loans, to the amount set for federal first mortgage loans ; and that a limit thus increased would be advantageous in states where land values are as high and as stable as they are in Illinois. Advocates of this plan have further estimated that the percentage of the loan coiild in this manner be increased from 50 per cent of the value of the land to 60 or even 80 per cent. While it is admitted that second mortgage land bonds could not be as readily sold throughout the entire country as are the federal first mortgage bonds, the proponents of this plan urge that second mortgage bonds on Illinois farms would find a ready sale wherever the high productive value of Illinois land is known. 1119 VI. SYSTEMS FOR SHORT-TIME CREDITS. hi addition to the loii^ time loans secured by niortgaf^es on lands antl improvements, the farmer is often in need of short-time credits to supply him with workint:^ ca])ital or to provide for unforseen emer- gencies in the operation of his business. The personal credit unions which have operated in New^ Zealand and in Denmark have particularly aided in developing the agricultural resources of those countries. A system of short-time credits which would utilize the personal credit of farmers would be an undoubted aid in a community lacking a sufificient number of local banks to look after such local needs. In Illinois the local banks throughout the state seem to be meeting the problem of short-time credits for agriculture in an adequate man- ner, and accordingly, the need for such personal credit unions does not seem to be as pressing as it is in certain communities not so adequately served. A considerable number of private cooperative credit associations have been organized in the United States, but they have experienced difficulty in winning the confidence of borrowers or investors where they have been operated without any form of state supervision^ At the present time the short time credits supplied by local banks through- out the state seem to be meeting the needs of farmers in this direction. Cooperative credit associations under state supervision have played an important role in the Australian commonwealth. Within recent years a number of states in this country have made provision for such associations. A law enacted in Nebraska in 1910 (ch. 198) is typical of legislation of this sort: the associations arc placed under the super- vision of the State Banking Board and are empowered to make loans to members. In order further to safeguard their funds, they are em- powered to invest such funds as may not be required for loans to mem- bers or for immediate use. in bonds of federal, state, local and munic- ipal governments, in bonds issued under the federal farm loan act, or in other securities ai)j)roved by the State Banking Board. :i8o VII. CONCLUSIONS. The problems before the constitutional convention with re- spect to this matter will, of course be as to whether the consti- tution shall be so changed as to authorize a state system of rural credits, and also as to whether anything shall be done to permit further action with respect to farm tenancy. By Article XI, Section 5 of the constitution, the state is now expressly prohibited from engaging in the banking business in any manner ; and by Article IV, Section 20, it is forbidden to loan its credit to any corporation, association or indiv- idual. The problem of farm loans, therefore, is necessarily a consti- tutional problem, and if the state is to be authorized to undertake such loans, these constitutional provisions must be changed. The present language of the constitution with respect to taxation also clearly pro- hibits the imposition of gradviated taxes on large land holdings. If these matters are to be dealt with, some constitutional change is therefore necessary, and this constitutional change may be ac- complished either by omitting present restrictions, or by placing de- tailed provisions in the constitution with respect to the matters sought to be accomplished. It is hardly likely that all provisions with respect to banking and with respect to taxation will be omitted from the consti- tution. The authorization of new activities here dealt with may be ac- complished merely by rephrasing the present constitutional provisions. The problems of farm tenancy and farm loans are relatively new in this country and it is highly unwise to embody into a constitution de- tailed provisions, which may soon need change in order to meet chang- ing needs. The Oregon constitutional amendment quoted in full earlier in this bulletin indicates the type of constitutional provisions that should be avoided. 1121 APPENDIX— REFERENCES. Carver, T. N. Economic Si^iificance of Changes in the Rural Pop- ulation. Annals of the American Academy of Political and Social Science, Philadelphia, XL, 21-25, March, 1912. Coulter, J. L. Changes in Land Values, Farms, Tenants and Owners since 190U. American Statistical Association Publications, Boston. XII, 472-475, iMarch, 1911. Fairlie, John A. Needed Tax Reforms in Illinois. Proceedings of the National Tax Association, 1913. Haig, Robert M. A History of the General Property Tax in Illinois. University of Illinois Studies in the Social Sciences, Vol. Ill, Nos. 1 and 2. (March-June, 1914.) Hibbard, B. H. Tenancy in the North Central States. Quarterly Journal of Economics, Harvard University. XXV, 710-730, Aug- ust, 1911. Hibbard, B. H. The Decline in Rural Population. American Stat- istical Association Publications, Boston. XIII, Whole No. 129, 85-95, March, 1912. Holmes, George K. The Sources of Rural Credit and the Extent of Rural Indebtedness. Bulletin of Social and Economic Intelligence, International Institute of Agriculture, Rome, April and May, 1913. Illinois. Agriculture, Annual Reports and Year Books of the Depart- ment of, (Between ]s(j2 and 18.S.S the agricultural reports were printed as reports of the Commissioner of Agriculture; since 1889, as reports of the Secretary of Agriculture. The Year Books have been issued since 1894.) Kinley, David. The Movement of Population from the Country to the City. Cyclopedia of .American Agriculture, New York and London, 1909, IV, 113-119. Morman, James B. The Principles of Rural Credits. Rural Science Series, edited by L. H. Bailey, New York, 1919. Stewart, C. L. An Analysis of Rural Banking Conditions in Illinois, Chicago, Illinois Bankers Association, 1914. Stewart, C. L. I^nd Tenure in the United States with Special Ref- erence to Illinois. University of Illinois Studies in the Social Sciences. Vol. V, No. 3, September, 1916. Taylor, H. C. Landownership and Tenancy. Cyclopedia of American Agriculture, New York and London, 1909, IV, 174-185. 1122 United States. Census Reports, United States Census Bureau, Volume on Agriculture, 1880, 1890, 1900 and 1910 ; Farms and Homes, 1890 ; and bulletins of the Thirteenth Census on Agriculture. Washington, Government Printing Office. United States, Treasury Department, Federal Farm Loan Bureau; Circular No. 1. National Farm Loan Associations; Organization, Management, Powers, and Limitations. Issued by the Federal Farm Loan Board, March 20, 1917. Washington, 1917. Circular No. 2. How Farmers May Form a National Farm Loan Association. Issued by the Federal Farm Loan Board, August, 1919. Washington, 1919. Circular No. 3. (Revised) The Improved Farm Mortgage. A story illustrating the practical application of the Federal Farm Loan Act. Issued by the Federal Farm Loan Board, January 2, 1919, Washington, 1919. Circular No. 4. (Revised) The Federal Farm Loan Act, with Amendment approved January 18, 1918. Issued by the Fed- eral Farm Loan Board, August, 1919, Washington, 1919. Circular No. 5. The Farm Loan Primer. With definitions, rulings, and regulations of the Federal Farm Loan Board to June 1, 1917. Here you will find in hnei form answers to the questions most frequently asked about the Federal Farm Loan Act. Issued by the Federal Farm Loan Board. Fifth edition: July 23, 1918. Washington, 1918. Circular No. 7. (Revised) Killing off Mortgages. A description of the methods of amortization and their benefits to borrowers. Issued by the Federal Farm Loan Board. July, 1919. Wash- ington, 1919. Circular No. 10. Rulings and Regulations of the Federal Farm Loan Board to June 30, 1919. In Matters Pertaining to the Fed- eral Farm Loan Act. Issued by the Federal Farm Loan Bank. July, 1919. Washington, 1919. Warren, G. F. Crop Yields and Prices, and our Future Food Supply. Cornell University Agricultural Experiment Station. January, 1914. 1123 INDEX. AUSICNTEE LANDLORDISM, 1087 AMORTIZATION of loans. 1103 ARIZONA fanii loan system. 1114 HANKS I>rohibitioii upon [riMieral asseniblv with re- spect to, 1083, 1120 t ALIFORNLA eiicourugenient o( small lioliIiii;;s in, 1087 CO-dl-KRATIVE CREDIT ASSOCIATIONS, 1119 , _M CREDIT UNIONS in New Zealand and Derimark, 1119 DENMARK credit unions, 1119 EXTINCTION OF FARM I.OANS, 1103 1106 FARM LOAN ASSOCIATIONS, I(;90 FARM LOAN BONDS as investments, 1100, 1106 FARM LOANS actually made. 1093, 1095. 1102 loiiditions of loans undrr (.■.lirJ liu, 1096 FARM TENANCY, 1085 FEDERAL FARM LOAN SYSTEM, 1089 FEDERAL LAND BANKS, 1090, 1094-1100 FIRST MORTGAGE SYSTEMS. 1084, 1089, 1110 am ILLINOIS fann tenancy in, 1085 INVESTMENTS farm loan bonds ns, 1100. 1106 investments in land, 1087 JOINT STOCK LAND HANKS, 1100 1103 KANSAS proposal for farm loans, 1118 LAND BANKS. FEDERAL, 1094 LAND SETTLEMENT t ( iMMISSIONS, 1086 MAINE farm loans, 1115 MINNESOTA farm loan system, 1114 proposed second mortgasc .system, 1118 MONTANA farm loan system, 1114 MORTGAGE SYSTEMS Si-c First mortgage systems; Second Mort- gage systems NATIONAL FARM LOAN ASSOCIATIONS, 1090-1094 NEBRASKA legislation for co-operative credit associa- tions, 1119 NEW ZEALAND creilit unions, 1119 farm tenancy, 1087 NORTH DAKOTA fami loan system, 1111 OKLAHOMA fann loan system, 1114 ((RECON fann loan system, 1112 text of farm loan amendment, 1112 REFERENCES, 1121 SECOND MORTCAGE SYSTEMS, 1084. 1118 SIIORT-TIME CREDITS, 1110 SOLDIERS settlement of, 1115, 1116 SOUTH DAKOTA farm loan system, 1110 TAXATION requirement of uniformity, 1083, 1120 proposals of, 1986 TENANCY farm, 1085 x LOAN DEPT. •>.< • i LD2lA-60w-6;69 (J9096sl0)476-A-3. Caylord Bro«. Mahara Syraouaa, N . Y . YD V -^^^3 ■^^ .J"" '^:87l-^': UNIVERSITY OF CAUFORNIA LIBRARY